What Is a Commercial-Truck Loan?
Commercial truck financing involves securing a loan or lease arrangement designed to spread out the costs associated with buying a commercial vehicle. While you work towards repaying the borrowed funds, you will also cover interest charges and, in some cases, additional fees to your lending institution.
Commercial Truck Loan: Key Terms to Know
In order to understand how this truck loan works, let's get familiar with some of the most common terms you might come across.
- Interest rate: The interest rate is a percentage that’s based on the borrower’s risk level. It’s typically fixed, meaning it won’t change over time. However, some loans come with a variable rate that changes with the market.
- Loan term: This is the repayment term, or how long you have to repay the loan. A short-term loan typically lasts for two to four years. An average term loan lasts three to five years. And a long-term loan lasts five to 10 years.
- Credit score: Having good credit (670+) can boost your approval odds and give you more competitive rates and terms. However, some lenders will still work with borrowers with bad credit.
- Down payment: Most lenders require a down payment based on the purchase price. The higher the down payment, the better your approval odds. A larger down payment could also mean paying less in interest over time.
- Collateral: Most commercial truck loans are secured using collateral, which is typically the vehicle itself.
How Commercial Truck Loans Work
The way a commercial truck loan works is simple. It helps businesses buy a vehicle over a period of time. The business owner applies for the loan and provides information about their business and the truck they want to buy, which may require them to pay money upfront as a down payment. If approved, the lender gives them the loan amount, interest rate, and repayment terms. The borrower pays back the loan in regular installments over a few years, and the truck serves as collateral.
Commercial truck loans can have different repayment terms, but most last from two to 10 years. Generally, a longer loan term means a lower monthly payment. The downside to a longer term is that you’ll pay more in interest over the life of the loan.
Several factors play into your eligibility for a commercial truck loan, as well as the rates you get. Most lenders will look at your credit score, business income and history, and other debts or liabilities you currently have. The better your credit and income, the lower your interest tends to be.
Certain loans will come with additional fees, so keep this in mind when comparing offers. Common fees include origination fees — incurred when you take out a loan — and late fees.
Common Vehicles for Commercial Truck Loans
You can use a commercial truck loan for several different types of vehicles. This includes:
- Large tractor trailers
- Delivery vans
- Medium-sized box trucks
- Semi-trucks
- Tanker trucks
- Dump trucks
- Flatbed trucks
- Used commercial trucks
- New commercial trucks
Be prepared to explain which type — or types — of vehicle you intend to purchase with your loan. Otherwise, a lender might not approve your application.
Average Commercial Truck Loan Rates and Requirements
Rates and requirements vary by lender, but here are some commercial truck loans from reputable lenders:
*Rates subject to change
How to Get a Commercial Truck Loan
Although the process can vary, here are the basic steps for getting a commercial truck loan:
- Determine your needs: Assess your business requirements and determine the type of truck you need and how much you can afford. Consider things like the truck's purpose, make, model, age, and estimated cost.
- Be aware of the eligibility requirements: Most lenders will check your credit score, income, and financial situation before offering you a loan. You may also need to provide a down payment, and income and financial statements for your business. If you have a specific vehicle in mind, make sure you know its current age and mileage.
- Compare loans and lenders: Shop around for lenders until you find a few that will work with you. Compare their requirements, rates, terms, and other fees. Some lenders — such as CAG Truck Capital — offer direct financing, while others are marketplaces. Narrow down your options to find the best one for your business.
- Gather the required documents: To secure a commercial truck loan, you need to collect the required documentation beforehand. Among them are financial statements such as
- Specific details about the truck
- Annual income statement
- Balance sheets
- Time in business
- Bank statements
- Apply: Fill out the loan application and provide the lender with the information they need about your business, finances, and the truck you intend to buy. As soon as your application has been approved, review all loan terms, including interest rates, repayment terms, monthly payments, and fees.
- Prepare a Down Payment: Determine if a down payment is required and gather the necessary funds. The down payment amount can vary based on factors like the lender's policies, your creditworthiness, and the truck's age. It is typically a percentage of the truck's purchase price.
- Complete the Loan Process: It may take a few weeks to get your loan approved. Once you accept the loan offer, your lender will guide you through the remaining steps.
Commercial Vehicle Loans: Pros and Cons
There are several advantages and disadvantages to using a loan to buy a commercial vehicle, especially compared to leasing one. Here are the main ones to consider.
| Pros |
Cons |
| Poor or bad credit borrowers may qualify for a commercial truck loan |
Vehicles may be repossessed if payments aren't made |
| Finances commercial vehicles without cash |
Usually a down payment required by most borrowers for trucks |
| Increases working capital so you can use it for other expenses |
May have a higher monthly payment than leasing a vehicle |
| Tax depreciation: mileage and actual expenditures. |
A truck's value depreciates over time regardless of loan amount |
When Should You Get a Commercial Truck Loan?
If you see industry changes or new opportunities for growth, consider taking out a commercial truck loan:
- Seize new opportunities, reach wider customer bases, and increase revenue potential.
- For full control over logistics operations, leading to timely deliveries and improved customer satisfaction for your business.
- Flexibility to customize vehicles to meet specific business needs, enhancing operational efficiency.
- To identify industry trends and select the appropriate type and size of trucks that align with your target market.
Borrowers may benefit from tax advantages when taking a commercial truck loan, as certain expenses related to the purchase and operation of commercial vehicles can be tax-deductible, potentially reducing overall tax liabilities.
Commercial Truck Loan Alternatives
While commercial truck loans are a common way for owner-operators to finance their trucking business, they may not be the best option for everyone. Fortunately, there are alternative financing options available that can help you get the commercial truck you need without a traditional loan. Some of these alternatives include:
- Business line of credit: A business line of credit is a revolving credit account that you can draw from as needed, up to a predetermined credit limit. This can be a flexible way to finance your truck or other business expenses, as you only pay interest on the amount you use. However, you may need to provide collateral or have a good credit score to qualify for this type of financing.
- Small business loans: There are a variety of small business loans available that can be used to finance a commercial truck purchase. These loans may be backed by the Small Business Administration (SBA) or other lenders, and may have different requirements and terms depending on the lender and the loan program. Some small business loans may require collateral, while others may have more lenient credit requirements.
- Personal loans: While using a personal loan to finance a commercial truck is not ideal, it can be an option if you don't qualify for other types of financing. However, you should be aware that personal loans may have higher interest rates and shorter repayment terms than commercial loans, and you may not be able to borrow as much money.
- Lease-to-own programs: Some dealerships or trucking companies may offer lease-to-own programs for commercial trucks. These programs allow you to lease a truck with the option to purchase it at the end of the lease term. This can be a good option if you don't have the cash on hand to purchase a truck outright, but want to build equity in a truck over time. However, lease-to-own programs may have higher overall costs than purchasing a truck outright, and you may be responsible for maintenance and repair costs during the lease term.
- Equipment leasing: Instead of purchasing a truck, businesses can opt to lease it for a set period of time. This can be a good option for those who don't want to make a long-term commitment or who don't have the upfront funds to purchase a truck outright.
- Invoice financing: This type of financing allows businesses to get cash advances on their outstanding invoices. This can help with cash flow and provide funds to purchase a truck without taking out a loan.
Leasing vs. Purchasing a Commercial Vehicle
When deciding whether to take out a loan to buy a commercial truck or lease one, there are a number of factors to consider. Some of the most important factors include:
- Your budget: Buying a commercial truck can be a significant investment, while leasing can be more affordable in the short term.
- Your needs: If you need a truck for a long period of time, buying may be the better option. If you only need a truck for a short period of time, leasing may be a better option.
- Your driving habits: If you put a lot of miles on your truck, buying may be the better option. If you don't put a lot of miles on your truck, leasing may be a better option.
- Your tax situation: The tax implications of buying and leasing a commercial truck can vary depending on your individual circumstances. It's important to consult with a tax advisor to understand the full implications of each option.
| Leasing |
Purchasing |
|
Lower upfront costs: Leasing typically requires a smaller down payment and lower monthly payments than purchasing.
|
Ownership: Purchasing a vehicle gives you full ownership and control over the asset.
|
|
Maintenance and repair included: Many lease agreements include maintenance and repair costs, which can save you money in the long run.
|
Customization: You can customize the vehicle to fit your business needs by adding graphics or modifications
|
|
Tax benefits: Lease payments may be tax-deductible as a business expense.
|
Equity: As you make payments on a purchased vehicle, you build equity that can be used as collateral for future financing needs.
|
|
Option to upgrade: At the end of the lease term, you can return the vehicle and upgrade to a newer model.
|
Resale value: When you own the vehicle, you have the option to sell it and potentially recoup some of your investment.
|
|
Flexibility: Leasing allows for more flexibility in terms of switching vehicles and adjusting fleet sizes as needed.
|
The total cost of ownership: Over the long term, purchasing a vehicle may be less expensive than leasing due to avoiding the cost of multiple lease payments.
|
| Average monthly payment: $900-$1200 |
Average monthly payment: $1,500-$2,500
|
You should take the time to shop around for the right loan options. Carefully consider the costs and risks before applying for a second-hand commercial truck loan.
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